The Board. Directors Report

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1 Directors Report 2017 Annual Report 34 CALTEX AUSTRALIA The Board Introduction The Board of Caltex Australia Limited presents the 2017 Directors Report (including the Remuneration Report) and the 2017 Financial Report for Caltex Australia Limited (Caltex) and its controlled entities (Caltex Group) for the year ended 31 December 2017 to shareholders. An Independent Audit Report from KPMG, as external auditor, is also provided. Board of directors The Board of Caltex Australia Limited comprises Steven Gregg (Chairman), Julian Segal (Managing Director & CEO), Trevor Bourne, Melinda Conrad, Bruce Morgan, Barbara Ward AM, and Penny Winn. The following changes to the composition of the Board have occurred since 1 January 2017: Mr Greig Gailey retired as Chairman of the Caltex Board from August 2017 Mr Steven Gregg was appointed as Chairman of the Caltex Board from August 2017 Ms Melinda Conrad was appointed to the Caltex Board as an Independent, Non-executive Director, effective 1 March Steven Gregg Chairman and Independent, Non-executive Director Date of appointment: 9 October 2015 Appointed Chairman: 18 August 2017 Board committees: Nomination Committee (Chairman) Steven Gregg has over 25 years of investment banking experience in Australia and internationally and brings to the Board extensive executive, corporate finance, strategy, and mergers and acquisitions experience. Mr Gregg has held various roles with ABN AMRO, most recently as Global Head of Investment Banking and the CEO of the United Kingdom. Following this, Steven was a Partner in the Strategy and Financial Institutions practice at McKinsey & Company in Sydney and internationally. Mr Gregg is a director of Challenger Limited, Challenger Life Company Limited, Lorna Hodgkinson Foundation, Tabcorp Holdings Limited and William Inglis & Son Limited. He is the Chairman of Unisson Disability Limited and a trustee of the Australian Museum. He has previously served as Chairman of Goodman Fielder Limited and Austock Group Limited, and was a member of the Grant Samuel non-executive advisory board. Mr Gregg holds a Bachelor of Commerce from the University of New South Wales. 2 Julian Segal Managing Director & CEO Date of appointment: 1 July 2009 Julian Segal joined Caltex from Incitec Pivot Limited, a leading global chemicals company, where he served as the Managing Director & CEO from June 2005 to May Prior to Incitec Pivot, Mr Segal spent six years at Orica in a number of senior management positions, including Manager of Strategic Market Planning, General Manager Australia/Asia Mining Services, and Senior Vice President Marketing for Orica Mining Services. Mr Segal is a director of the Australian Institute of Petroleum Limited (appointed 1 July 2009). Mr Segal holds a Bachelor of Science (Chemical Engineering) from the Israel Institute of Technology and a Master of Business Administration from the Macquarie Graduate School of Management Trevor Bourne Independent, Non-executive Director Date of appointment: 2 March 2006 Board committees: OHS & Environmental Risk Committee (Chairman), Human Resources Committee and Nomination Committee Trevor Bourne brings to the Board broad management experience in industrial and capital-intensive industries, and a background in engineering and supply chain. From 1999 to 2003, he served as CEO of Tenix Investments. Prior to Tenix, Mr Bourne spent 15 years at Brambles Industries, including six years as Managing Director of Brambles Australasia. He has also previously worked for Incitec Pivot and BHP.

2 Mr Bourne is Chairman of Senex Energy Limited (appointed 10 March 2015), a director of Sydney Water Corporation (appointed February 2014) and was recently appointed as a director of Virgin Australia Holdings Limited (appointment 1 January 2018). He was previously a director of Origin Energy Limited (from February 2000 to November 2012). Mr Bourne holds a Bachelor of Science (Mechanical Engineering) from the University of New South Wales and a Master of Business Administration from the University of Newcastle, and is a Fellow of the Australian Institute of Company Directors. 4 Melinda Conrad Independent, Non-executive Director Date of appointment: 1 March 2017 Board committees: Audit Committee, OHS & Environmental Risk Committee and Nomination Committee Melinda Conrad brings to the Board expertise in strategy and governance and a background in retail and technology-led transformation. Ms Conrad is currently a non-executive director of ASX Limited, OFX Group Limited and The George Institute for Global Health. She is also a member of the ASIC Director Advisory Panel and the Australian Institute of Company Directors Corporate Governance Committee. Ms Conrad has previously served as a non-executive director of The Reject Shop Limited, David Jones Limited, APN News & Media Limited and the Garvan Medical Research Institute Foundation. Ms Conrad held executive roles at Harvard Business School, Colgate-Palmolive, several retail businesses as founder and CEO, and in strategy and marketing advisory. Ms Conrad holds a Bachelor of Arts (Hons) from Wellesley College in Boston, and a Master of Business Administration from Harvard Business School, and is a Fellow of the Australian Institute of Company Directors. 5 Bruce Morgan Independent, Non-executive Director Date of appointment: 29 June 2013 Board committees: Audit Committee (Chairman), Nomination Committee and OHS & Environmental Risk Committee Bruce Morgan brings to the Board expertise in financial management, business advisory services, risk and general management. He is the Chairman of Sydney Water Corporation and Redkite, and a director of Origin Energy Limited (appointed November 2012), the University of New South Wales Foundation and the European Australian Business Council. Prior to this, Mr Morgan was a partner with professional services firm PricewaterhouseCoopers (PwC) for over 25 years, where he practised as an audit partner with a focus on the energy and mining sectors. He was previously Chairman of the PwC Board and a member of the PwC International Board. Prior to that, he was managing partner of PwC s Sydney and Brisbane offices. Mr Morgan is a Fellow of the Australian Institute of Company Directors and Chartered Accountants Australia and New Zealand, and holds a Bachelor of Commerce (Accounting and Finance) from the University of New South Wales. 6 Barbara Ward AM Independent, Non-executive Director Date of appointment: 1 April 2015 Board committees: Human Resources Committee (Chairman), Audit Committee and Nomination Committee Barbara Ward brings to the Caltex Board strategic and financial expertise in senior management roles, including as Chief Executive Officer of Ansett Worldwide Aviation Services and General Manager Finance at TNT Limited. Ms Ward also served as a Senior Ministerial Adviser to the Honourable Paul Keating. Ms Ward is a director of Qantas Airways Limited and various Brookfield companies. An experienced director, she has previously served on the boards of various public companies including the Commonwealth Bank of Australia, Lion Nathan Limited and Multiplex Limited, and public sector entities, including as Chairman of Country Energy and, most recently, the Sydney Children s Hospital Foundation. Ms Ward is a member of the Australian Institute of Company Directors and holds a Bachelor of Economics and a Master of Political Economy from the University of Queensland. 7 Penny Winn Independent, Non-executive Director Date of appointment: 1 November 2015 Board committees: OHS & Environmental Risk Committee, Human Resources Committee and Nomination Committee Penny Winn brings to the Board Australian and international strategic, major transformation and business integration, technology and retail marketing experience. Prior to her appointment to Caltex, Ms Winn was Director Group Retail Services with Woolworths Group Limited, and she has over 30 years of experience in retail with senior management roles in Australia and internationally. Ms Winn is Chairman of Port Waratah Coal Services Ltd, a director of CSR Limited and has been recently appointed a director of Goodman Limited and Goodman Funds Management Limited. Ms Winn is a member of the University of Technology, Sydney (UTS) Business School s Advisory Board and a graduate of the Australian Institute of Company Directors. She has previously served as a director of a Woolworths business, Greengrocer.com, a Myer business, sass & bide, and Quantium Group and was a member of the Australian Payments Clearing Association s CECS Advisory Council. Ms Winn holds a Bachelor of Commerce from the Australian National University and a Master of Business Administration from the University of Technology, Sydney. 35

3 Directors Report continued Leadership Team Andrew Brewer Executive General Manager, Transformation Andrew Brewer was appointed to this position in He is an experienced senior executive in the energy and resources sector. Commencing his career as a professional electrical engineer, Andrew has held leadership roles in engineering, project management, maintenance, reliability, operations, business strategy, planning and general management. Andrew's career has spanned the minerals processing, resources and energy industries across Australia and in Canada where he was Downstream Country Chair and General Manager of the Burnaby oil refinery for Chevron Canada. Andrew also previously managed the Kurnell refinery. 2 Viv Da Ros Chief Information Officer Viv Da Ros was appointed to this position in December 2016 and is responsible for leading the technology transformation program at Caltex. He is a commercially-driven senior technology executive focused on customer-centric, innovative solutions which deliver operational efficiencies and engagement. His nearly 30 years of experience includes senior leadership positions in Australia, Asia and Europe, predominantly in the retail sector with the ASW Group, Tesco, KPMG and Dairy Farm International. Viv holds a Master of Business Administration from Manchester Business School and a Master of Project Management from the University of Technology, Sydney Annual Report CALTEX AUSTRALIA Simon Hepworth Chief Financial Officer Simon Hepworth was appointed to this position in He joined Ampol in 1996, after 10 years with Arthur Andersen. He is responsible for Finance, accounting and decision support, Treasury, Taxation, Investor Relations, Information Technology and procurement. Simon holds a Bachelor of Arts and a Masters of Applied Finance. He is a member of the Institute of Chartered Accountants in England and Wales. He is also a member of the Australian Institute of Company Directors. 7 8

4 4 Richard Pearson Executive General Manager, Convenience Retail Appointed in August 2017, Richard Pearson is accountable for leading the transformation of Caltex s retail and consumer fuel business. Richard has worked in retail and consumer goods for twenty years in Australia and the UK with a broad range of leadership experience across commercial functions. Before joining Caltex, Richard was a member of the leadership team at Coles Supermarkets where he was most recently the Supply Chain & Strategy Director. Prior to this, Richard was the Merchandise Director and the Director responsible for Coles Express. Richard holds a Bachelor of Arts from Cambridge University. 5 Lyndall Stoyles Executive General Manager, Legal and Corporate Affairs Appointed as Executive General Manager Legal and Corporate Affairs in October 2016, Lyndall Stoyles manages Caltex s legal, secretariat, internal audit, compliance and corporate affairs teams. As Executive General Manager Legal and Corporate Affairs, she is responsible for providing legal advice to Caltex s Board, CEO and broader leadership team. She is also Company Secretary to the Board. Lyndall has more than 20 years experience in advising on competitor, commercial and corporate head office legal issues. Prior to joining Caltex, Lyndall was Group General Counsel and Company Secretary for former logistics business Asciano and spent more than a decade with Clayton Utz advising on competition, commercial and corporate law issues in a broad range of industries. Lyndall holds a Diploma of Law/Master of Law from the University of Sydney and is a member of the Australian Institute of Company Directors. 6 Alan Stuart-Grant Executive General Manager, Strategy and Corporate Development Appointed as Executive General Manager, Strategy and Corporate Development in November 2017, Alan Stuart-Grant manages Caltex s strategy, corporate development and M&A activities. Prior to joining Caltex, Alan held a senior position in the Oil and Gas department of Glencore plc, and prior to that spent more than a decade in private equity and investment banking, working in Sydney, London and Singapore. Alan holds a Bachelor of Science (Business Administration) degree from the University of Bath, and is also a member of the Australian Institute of Company Directors. 7 Joanne Taylor Executive General Manager, Human Resources Joanne Taylor joined Caltex in She is an accomplished human resources leader, having worked in human resources and operational roles for businesses such as McDonald s Australia, Westpac, The Star and The Australian Industry Group. Her last role at McDonald s was Senior Vice President Human Resources, Corporate Communications and Supply Chain. Prior to this, her roles included leading the franchise and company operations across New South Wales and the Australian Capital Territory for approximately 290 retail stores. Joanne holds a Bachelor of Commerce from the University of New South Wales. 8 Louise Warner Executive General Manager, Fuels & Infrastructure Appointed as Caltex Australia s Executive General Manager, Fuels & Infrastructure in 2017, Louise Warner is responsible for ensuring competitive reliable fuel supply for our customers. Louise joined Caltex in 1999 and her career has spanned a range of roles within the company, starting as a process engineer at the Kurnell refinery. Louise gained commercial and trading experience through her secondment to Chevron UK. Recently, she was responsible for successfully establishing Caltex Australia s first overseas operation, Ampol Singapore, which includes the company s global trading and shipping function. Louise holds a Bachelor of Engineering (Chemical) from the University of New South Wales. 37

5 Directors Report continued 2017 Annual Report 38 CALTEX AUSTRALIA Operating and financial review The purpose of the operating and financial review (OFR) is to enhance the periodic financial reporting and provide shareholders with additional information regarding the Group s operations, financial position, business strategies and prospects. The review complements the Financial Report on pages 77 to 119. The OFR may contain forward-looking statements. These statements are based solely on the information available at the time of this report, and there can be no certainty of outcome in relation to the matters to which the statements relate. Company overview Caltex, including predecessor companies, has safely and reliably fuelled the needs of Australian motorists and businesses for more than a century. Caltex is one of Australia s leading transport fuel suppliers and convenience retailers and is listed on the Australian Securities Exchange. The head office is in Sydney, and the company has approximately 4,700 employees. Caltex aims to be the market leader in complex supply chains and the evolving convenience marketplace, by delivering the fuel and other everyday needs of its diverse customers through its networks. The principal activities of Caltex during the year were the purchase, refining, distribution and sale of petroleum products and the operation of convenience stores throughout Australia and the north island of New Zealand under Gull NZ. There were no significant changes in the nature of Caltex s principal activities or in the state of affairs during the financial year. At Lytton in Brisbane, Caltex manufactures fuels including LPG, petrol, diesel and jet fuel, lubricants, greases and other small amounts of fuel oil and speciality products. Caltex also buys refined products on the open market both overseas and locally through our shipping and trading entity Ampol. The products that Caltex manufactures and imports are marketed and distributed to retail and commercial consumers and are supplied via a network of pipelines, terminals, depots, barges and company-owned and contracted transport fleets. Group strategy Over the past five years, Caltex has transformed from a refiner-marketer through to a leading integrated transport fuels business, with a largely franchised convenience retail business. In 2016, we launched our new vision, the Freedom of Convenience, announcing our intention to continue our transformation from being the leading provider of transport fuels to a much more diverse organisation that operates across complex supply chains and the evolving retail convenience marketplace. In 2017, Caltex made the decision to change its operating model by establishing two inter-dependent, but different businesses which require separate cultures, processes and systems, both with significant growth options. The company has merged Supply, B2B, Refining and Infrastructure into one business unit (Fuels & Infrastructure) to better optimise our value chain. Convenience Retail will focus on the company s consumer-facing petrol and convenience (P&C) business. As part of this decision to optimise the existing operating model, Caltex identified initial expected cost savings of approximately $60 million (before tax) per annum, with the full annual run rate expected to be achieved by the end of the first quarter of Associated restructuring costs of $23 million (including redundancy costs, other cash and non-cash costs) were recognised in The cost savings include headcount reduction of approximately 120 roles across both operational and support functions and other identified cost savings. The operating model review is continuing with a focus on further enhancing our capabilities and competitiveness, including the delivery of further efficiencies through more fit for purpose operating models for each business. Caltex will keep the market regularly updated as this review and other phases of our transformation progress. The strategy outlined below has been updated to reflect the decision to establish two inter-dependent operating businesses. The Protect and Grow aspect of the strategy is focused on capturing the many opportunities that exist to continue to enhance and expand the Fuels & Infrastructure business. In the Extend aspect of the strategy, Caltex will build on its current assets, capabilities and customer base to develop the Convenience Retail business in both existing and new adjacent markets.

6 Caltex s strategy overview Our Strategy Freedom of Convenience To be the market leader in complex supply chains and the evolving convenience marketplace, by delivering the fuel and other everyday needs of our diverse customers through our networks. Optimise infrastructure position Connect to win Fuels & Infrastructure Grow trading and shipping Find new ways Strategy Protect and Grow Serve business customers to protect and grow the supply base Own it Convenience Retail Extend Enhance the fuel retail customer offering Create new customer solutions in the convenience marketplace Top quartile shareholder returns for investors Make a difference for customers Enhance capabilities and competitiveness Safety Efficiency People Technology Fit for Purpose Never stop caring 39 Assessing each element in turn Optimise infrastructure position Grow trading and shipping Protect and grow supply base Enhance the fuel retail customer offering Maintain a relentless focus on a cost-competitive supply chain through excellence in infrastructure and refinery management and being proactive in adapting to changing market dynamics and pursuing new infrastructure opportunities. Continue to develop and expand the capabilities and operations of Ampol. This allows Caltex to capture opportunities for value creation in sourcing and delivering product, and enables international expansion into the Asia Pacific region. Execute organic and inorganic strategies to increase marketing volumes in target regions to support long term infrastructure investment and competitive supply. Continue to develop elements of the fuel site retail offer which will attract more customers to Caltex sites and increase customers spend while there. Create new customer solutions in the convenience marketplace Leverage Caltex s existing strong consumer-facing business, including our network of over 900 retail sites and over three million weekly customer visits, to build a new and differentiated convenience offer for customers across multiple formats, products, locations and channels. All of these elements of strategy are underpinned by a strong focus on continually enhancing Caltex s capabilities and competitiveness through: Safety systematically managing both personal and process safety across the business to drive towards zero injuries and environmental harm. Efficiency continuing to drive down costs and utilise assets more efficiently to ensure an industry-leading cost structure. People continuing to invest in our people to strengthen organisational capability and agility. Technology continuing to invest in new technologies in order to drive operational efficiencies. Fit for Purpose culture, metrics and measurement will vary between the two businesses. Through the strategies outlined above, Caltex is committed to growing earnings by capturing opportunities across all elements of its existing business, as well as through extending into adjacent areas.

7 Directors Report continued Operating and financial review continued Group strategy continued In pursuing this clear growth agenda in both the Protect and Grow and Extend aspects of the business strategy, Caltex will continue to assess potential acquisitions. These will only be pursued, however, where the strategic rationale is compelling and they deliver appropriate risk adjusted returns for shareholders. Caltex s measure of success continues to be to safely and reliably deliver top quartile total shareholder returns. Caltex Group results 31 December 2017 On an historical cost profit basis, Caltex recorded an after-tax profit of $619 million for the 2017 full year, including significant items of $14 million loss. This compares with the 2016 full year profit of $610 million, which included no significant items. The 2017 result includes a product and crude oil inventory gain of $12 million after tax. The 2017 total inventory gain of $12 million compares with an inventory gain of $86 million after tax in A reconciliation of the underlying result to the statutory result is set out in the following table: Reconciliation of the underlying result to the statutory result 2017 $m (after tax) 2016 $m (after tax) 2017 Annual Report Net profit attributable to equity holders of the parent entity Deduct/add: Significant items (gain)/loss 14 Deduct/add: Inventory (gain)/loss (12) (86) RCOP NPAT (excluding significant items) On an RCOP 1 basis, Caltex recorded an after-tax profit for the 2017 full year of $621 million. This compares with an RCOP after-tax profit of $524 million for the 2016 full year, excluding significant items. $m Caltex RCOP NPAT* RCOP NPAT 1H RCOP NPAT 2H CALTEX AUSTRALIA * RCOP Net profit after tax, excluding significant items 1. Replacement cost of sales operating profit (RCOP) excluding significant items (on a pre- and post-tax basis) is a non-international Financial Reporting Standards (IFRS) measure. It is derived from the statutory profit adjusted for inventory (gains)/losses, as management believes this presents a clearer picture of the company s underlying business performance, and is consistent with the basis of reporting commonly used within the global refineries industry. This is unaudited. RCOP excludes the unintended impact of the fall or rise in oil and product prices (a key external factor). It is calculated by restating the cost of sales using the replacement cost of goods sold rather than the historical cost, including the effect of contract based revenue lags.

8 Caltex Group Results 31 December 2017 continued Dividend The Board has declared a final dividend of 61 cents per share (fully franked) for the second half of Combined with the interim dividend of 60 cents per share for the first half, this equates to a total dividend of 121 cents per share for 2017, fully franked. This equates to a total dividend of 121 cents per share for 2017, fully franked. This compares with a total dividend payout of 102 cents per share (fully franked) for This is in line with a target dividend payout ratio of 40-60% of RCOP NPAT. Income statement For the year ended 31 December $m 2016 $m 1. Total revenue 1 21,424 17, Total expenses (20,489) (17,122) Replacement cost earnings before interest and tax Finance income 3 7 Finance expenses (70) (80) 3. Net finance costs (67) (73) Income tax expense 2 (247) (216) Replacement cost of sales operating profit (RCOP) Significant items gain/(loss) after tax (14) 5. Inventory gain/(loss) after tax Historical cost net profit after tax Interim dividend per share 60c 50c Final dividend per share 61c 52c Basic earnings per share Replacement cost (excluding significant items) 238c 199c Historical cost (including significant items) 237c 232c 41 Discussion and analysis Income statement 1. Total revenue 19% 2. Total expenses replacement cost basis 20% Total revenue increased primarily due to the increase in world petroleum product prices, which reflects the rise in world crude oil prices, and the impact of higher refiner margins (a component of refined product prices). Product prices are denominated in US dollars. This increase was partly offset by the rise of the Australian dollar. The weighted average Brent crude oil price in 2017 was US$54/bbl, compared to US$44/bbl in Total expenses also increased primarily as a result of higher replacement cost of goods sold due to the higher price of refined product. 1. Includes other income of $2 million (2016: $2 million) less the significant item loss of $14 million (2016: nil). 2. Excludes tax payable on inventory gain of $6 million (2016: $37 million tax benefit) and excludes tax cost on significant items of $10 million (2016: nil).

9 Directors Report continued Operating and financial review continued Income statement continued RCOP EBIT breakdown Annual Report 42 CALTEX AUSTRALIA Caltex Refiner Margin (CRM) $641m Transport fuels margin $1,188m Lubricants and specialties margin $83m Non-fuel income $150m Operating expenses ($1,052m) Other ($75m) RCOP EBIT excluding significant items $935m CRM represents the difference between the cost of importing a standard Caltex basket of products to eastern Australia and the cost of importing the crude oil required to make that product basket. The CRM calculation basically represents: average Singapore refiner margin + product quality premium + crude discount/(premium) + product freight crude freight yield loss. US dollar CRM was higher in 2017 at US$13.02/bbl, compared with US$10.50/bbl for In AUD terms, the CRM was Australian cents per litre in 2017, compared with 8.88 Australian cents per litre in Total refinery production in 2017 of all products was 6.2 billion litres, compared with 6.4 billion litres in 2016, reflecting the closure for turnaround and inspection (T&I) maintenance work that occurred in Transport fuels comprise petrol, diesel and jet. The transport fuels margin consists of the earnings on these products within the Supply and Marketing segment and represents the integrated sourcing, distribution and sales margin margins benefited from the contributions of the Gull NZ and Milemaker acquisitions. Premium domestic fuel sales were 4.8 billion litres in 2017, compared with 4.4 billion litres in Caltex s overall domestic transport fuel sales volumes have increased 3% in Total retail diesel margins have continued to grow strongly, driven by increased sales of the premium diesel product, Vortex Diesel, and as a result of growth in the diesel vehicle market. The higher transport fuel sales volumes reflected an increase in Jet and Vortex Diesel sales partly offset by declining petrol sales. The decline in unleaded petrol sales is driven by the substitution to vehicles requiring diesel fuels and efficiencies to internal combustion. Jet volumes increased 6%, driven by increased domestic capacity and a high win rate of new business. Lubricants and specialties products include finished lubricants, base oils, liquefied petroleum gas, petrochemicals, wax and marine fuels. Non-fuel income includes convenience store income, franchise income, royalties, property, plant and equipment rentals, StarCard income and share of profits from distributor businesses. Non-fuel income is $27 million lower than in the prior year, driven by the short term impact of transition of around 175 franchised sites to company operations (lower royalties and other franchise fees as well as incurring costs to convert sites). Operating expenses include Supply Chain, Marketing and Corporate operating expenditure. There has been an increase of $39 million from 2016 due to: higher depreciation and amortisation of $20 million incremental operating expenses in relation to the Milemaker and Gull NZ acquisitions, increased major project costs (including M&A and franchisee review), partly offset by good cost control and a low inflationary environment. Other includes a number of miscellaneous items that include: foreign exchange impacts, other refining gross margin impacts, gain/loss on disposal of assets and subsidiary earnings. There was a net foreign exchange loss of $26 million (after hedging) in The breakdown of RCOP shown here represents a management reporting view of the breakdown and, therefore, individual components may not reconcile to statutory accounts.

10 Discussion and analysis Income statement continued 3. Net finance costs 8% 4. Significant items after tax $24m 5. Inventory gains after tax $74m Net finance costs decreased by $6 million compared with The key driver of the reduction in interest cost is a lower average interest rate on borrowings, driven by savings of $5 million on repayment of subordinated notes in September 2017, partially offset by the impact of higher average daily borrowings in 2017 relative to During 2017, there were net significant items of $24 million loss ($14 million loss after tax). The significant items are a result of the announced establishment of the Franchisee Employee Assistance Fund ($20 million), restructuring and redundancy costs associated with the capability and competitiveness project Quantum Leap ($23 million), offset by the profit on sale of Caltex s fuel oil business and the utilisation of prior period capital losses to partially offset tax expense on the profit on sale. During 2016, the Group has recognised no significant items. Inventory gains were driven by the increase in crude oil prices in 2017, with crude oil rising from US$54/bbl in December 2016 to US$64/bbl in December The crude price movement, partly offset by an increase in the Australian dollar over the period, combined with the result of hedging activity and variability in timing of purchases compared to sales, resulted in a net inventory gain of $12 million after tax, compared to inventory gains of $86 million after tax in Business unit performance Supply and Marketing delivered an EBIT result of $733 million. This result includes unfavourable externalities of $43 million, comprising a net realised loss (after hedging) on foreign exchange of $26 million (2016: a realised loss of $4 million) and a price timing lag loss of $17 million (2016: a price timing lag loss of $25 million). The underlying Supply and Marketing EBIT increased 5.1% to $776 million, excluding externalities (+2.1% excluding the impact of acquisitions made during the year). Acquisitions added approximately $22 million EBIT during the year. Total Australian transport fuel volumes increased 3.4% to 16.2 BL, with commercial B2B volumes increasing 7.5% to 7.6 BL. Retail transport fuel volumes were flat at 8.6 BL. By product, total diesel volumes increased 7.3% to 7.7 BL, while total petrols decreased 2.8% to 5.7 BL, broadly in line with industry trends. Commercial diesel volumes grew 9.2% to 4.4 BL due to retention of core B2B customers, increased resource and commercial activities. Jet volumes increased 6.2% to 2.8 BL, reflecting strong market activity particularly across the East Coast and Caltex securing increased volumes from new and growing carriers. In Convenience Retail, growth across Caltex s premium Vortex diesel (+7.2% to 2.3 BL) more than offset modest declines across its premium petrol range (Vortex 95 down 2.1% and Vortex 98, down 1.3%). Total retail diesel volumes of 3.3 BL were 4.9% above prior year (2016: 3.1 BL). Caltex now has 27 new convenience retail stores operational under The Foodary format. Whilst there is significant variation by site (driven by site location, timing of opening, nearby competitive offers), the early results are encouraging, with strong customer feedback and an average non-fuel sales uplift of 35%. There have been some significant learnings with on-going development work around our fresh supply chain and labour model. Caltex intends to launch between 50 and 60 The Foodary sites and 5-10 Nashi high street convenience sites in 2018 at a capital cost of approximately $100 million, ahead of a wider roll out in later years. Lytton Refinery delivered an EBIT of $308 million in 2017, up $103 million or 50% on the prior year (2016 EBIT: $205 million). The refinery continues to operate reliably well with sales from production of 6.1 billion litres. This was marginally below the record 2016 performance (6.2 billion litres), due to some mini-turnaround maintenance work throughout the year. The average realised Caltex Refiner Margin (CRM) 1 for the twelve months to 31 December 2017 was US$12.87 per barrel. This compares favourably to the 2016 average of US$10.29/ bbl, which approximates the longer term (10 year) average. Caltex has decided to change from its historical position of 5 year whole refinery Turnaround & Inspection (T&I) maintenance, and from 2018 will move to an annual turnaround maintenance program. Lytton capital expenditure in 2018 is expected to approximate $60 million, including T&I of approximately $30 million. Corporate costs total $106 million, up $5 million on the prior year (consistent with previous guidance). This reflects M&A and other major project costs (including Caltex s company operating model and retail franchise network audit reviews), as well as investing in IT and retail capabilities that better position Caltex for the future The Caltex Refiner Margin (CRM) represents the difference between the cost of importing a standard Caltex basket of products to Eastern Australia and the cost of importing the crude oil required to make that product basket. The CRM calculation represents: average Singapore refiner margin + product quality premium + crude discount/(premium) + product freight crude freight yield loss.

11 Directors Report continued Operating and financial review continued Balance sheet as at 31 December $m 2016 $m Change $m 1. Working capital Property, plant and equipment 2,818 2, Intangibles Net debt (814) (454) (360) 5. Other non-current assets and liabilities (8) (18) 10 Total equity 3,108 2, Discussion and analysis Balance sheet 2017 Annual Report 1. Working capital $199m 2. Property, plant and equipment $127m 3. Intangibles $322m 4. Net debt $360m The increase in working capital is primarily driven by higher volume of trade sales outstanding at 31 December The increase in property, plant and equipment is primarily due to capital expenditure and accruals, including major cyclical maintenance, of $440 million and capitalised interest of $2 million. This is partly offset by depreciation of $205 million and disposals of $112 million. The increase in intangibles is primarily due to goodwill arising on acquisitions of $322 million. Net debt increased by $360 million to $814 million at 31 December Caltex s gearing at 31 December 2017 (net debt to net debt plus equity) was 20.8%, increasing from 13.9% at 31 December On a lease-adjusted basis, gearing at 31 December 2017 was 36.1%, compared with 28.4% at 31 December CALTEX AUSTRALIA Current Sources of Funding A$m Medium Term Notes 150 Source Australian and Asian Institutional Bilateral Bank Facilities* 1,360 Global Banks Inventory Finance Facilities 250 Global Banks $1,760m 250 Debt Maturity Profile 1, Beyond 2022 Bilateral Bank Facilities* (A$) Inventory Finance Facilities (A$) Medium Term Notes (A$) * AUD equivalent. Contains an evergreen provision to facilitate extensions. 5. Other non-current assets and liabilities $10m Other net non-current liabilities have decreased primarily due to a portion of non-current environmental liabilities becoming current as remediation works at Kurnell continue. Deferred tax assets have also been partially utilised, resulting from timing differences between the accounting and tax basis of inventory, provisions, and property, plant and equipment.

12 Cash flows For the year ended 31 December $m 2016 $m Change $m 1. Net operating cash inflows (193) 2. Net investing cash outflows (800) (357) Net financing cash outflows (135) (590) (455) Net increase/(decrease) in cash held (200) (19) (181) Discussion and analysis Cash flows 1. Net operating cash inflows $193m 2. Net investing cash outflows $443m 3. Net financing cash outflows $455m While receipts from customers are higher in 2017, this was largely offset by higher payments to suppliers, employees and governments, as both are driven by current product prices. The increase in net investing cash outflows is primarily due to business acquisitions including Gull NZ, Milemaker and Nashi. The net financing outflow in 2017 arose from dividend payments. Net proceeds/repayment of borrowings was $159 million, due to refinancing of bank facilities and repayment of the subordinated notes. The net financing outflow in 2016 arose from dividend payments and the execution of the $270 million share buy-back. Net proceeds/repayment of borrowings was nil, as there were no drawdowns or repayment of fixed borrowings in the period. Capital expenditure Capital expenditure in 2017 totalled $809 million. Excluding major T&I spending at Lytton refinery of $39 million, capital expenditure was $770 million, inclusive of the Gull NZ and Milemaker acquisitions of $424 million. Capital expenditure in 2018 is expected to range between $470 million and $540 million, including the intended acquisition of a 20% share in SEAOIL Inc. in 1H2018. Caltex Capital expenditure $m Business outlook and likely developments This section includes information on Caltex s prospects for future financial years. As Caltex s financial prospects are dependent to a significant extent on external factors, such as the market competitiveness, exchange rates and refiner margins, it is difficult to provide an outlook on Caltex s financial prospects. Therefore, this section includes a general discussion of the key business drivers. To the extent that there are statements which contain forward-looking elements, they are based on Caltex s current expectations, estimates and projections. Such statements are not statements of fact, and there can be no certainty of outcome in relation to the matters to which the statements relate. Accordingly, Caltex does not make any representation, assurance or guarantee as to the accuracy or likelihood of fulfilment of any forward looking statement. Overview Caltex s focus is to maintain a leading position within the transport fuels industry regionally and growing convenience retailing. In support of this, priorities include the optimisation of the entire value chain from product sourcing to customer, underpinned by the company s product sourcing requirements via Ampol Singapore The Lytton refinery will continue to focus on capturing further operational and margin improvements. Capex (incl. T&I) Milemaker acquisition Gull acquisition

13 Directors Report continued 2017 Annual Report 46 CALTEX AUSTRALIA Operating and financial review continued Business outlook and likely developments continued Supply and Marketing Optimising our infrastructure position means we run our assets in a safe and cost efficient way. This means we can supply what our customers need, anywhere they need it, safely and reliably, ultimately making their lives easier. During 2017 our Trading and Shipping team in Ampol successfully delivered new value to Caltex through its role as a competitive and reliable supplier to our Australian business. This new capability for Caltex provides our external market understanding, critical for our operations amidst a global business, while also providing a platform for growth. Ampol plays a critical role in our integrated value chain by leveraging our infrastructure positions such as the Kurnell terminal, optimising the supply chain around the Caltex Lytton refinery, including crude and feedstock, sourcing from a broader range of locations, and make-or-buy decisions around premium fuels. The international market knowledge provided by the experienced team and the strong shipping and operational capability allows Caltex to access new opportunities more rapidly as market conditions change. This includes re-optimising the trade flow for Australia, and capturing sales into new markets such as New Zealand, the Philippines and other regional supply locations. Our conservative approach to trading and shipping remains unchanged, with our activities focused on our strength of physical supply and optimisation. We continue to improve our risk management capability, by enhancing our prudent commodity risk management systems to enable opportunities in the international market, capture higher earnings and reduce cash flow volatility. We take pride in our expertise in managing complex supply chains and have demonstrated continued investment in distribution infrastructure into every corner of Australia throughout 2017, enabling us to better serve our customers and remain their supplier of choice. As our customers needs and wants evolve, we continually focus on making a difference for customers and building a convenience retail offer that gives them a reason to come to our sites whether that be to fill up their vehicle, enjoy a barista made coffee or have a digitally enabled experience to enjoy both was a transformational year for the Convenience Retail team as the first The Foodary store opened in January. The Foodary delivers barista-made coffee, fresh food, quality grocery products and services such as parcel pick-up for customers on the move. By the end of 2017, we had opened 23 The Foodary stores which included a landmark first for Caltex with the opening of our first non-fuel stand alone location in a transport hub in Newcastle, New South Wales. Caltex have announced the outcome of the 2 year review into the retail operating model to determine which operating model will best deliver the company s retail growth objectives. This review has determined that controlling our core business is essential to achieving our retail growth objectives. The company will achieve this by seeking to move all franchise sites to company operation by end Lytton The Lytton refinery is Caltex s sole refinery. Lytton Refinery continues to deliver on its promise to be a safe, reliable and competitive part of our supply chain. Business risks and management The key business risks that could have an impact on Caltex achieving its financial goals and business strategy are discussed below. In addition to the risk management procedures discussed below, Caltex has adopted a risk management framework to proactively and systematically identify, assess and address events that could potentially impact its business objectives. This framework integrates the consideration of risk into the company s activities so that: risks in relation to the effective delivery of the company s business strategy are identified control measures are evaluated, and where potential improvements in controls are identified, improvement plans are scheduled and implemented. These risks are assessed on a regular basis by management, and material risks are regularly reported to the Board and its committees. These reports include the status and effectiveness of control measures relating to each material risk. The Board, the Audit Committee, the OHS & Environmental Risk Committee and the Human Resources Committee each receive reports on material risks relevant to their responsibilities. The Board and the OHS & Environmental Risk Committee also receive risk updates throughout the year. We have not included information where it would be likely to result in unreasonable prejudice to Caltex. This includes information that is confidential or commercially sensitive or could give a third party a commercial advantage (for example, details of our internal budgets and forecasts), except where disclosure is required pursuant to our continuous disclosure obligations. Caltex Refiner Margin The CRM is a key metric which drives the profitability of Caltex s refinery. The CRM represents the difference between the cost of importing a standard Caltex basket of products to eastern Australia and the cost of importing the crude oil required to make that product basket. A low CRM will adversely impact Caltex s refining earnings and cash flows. The CRM can be negatively impacted by a range of factors: a decline in global and regional economic activity, leading to a surplus in refining capacity increased regional refinery capacity ahead of demand growth a decrease in product freight rates relative to crude freight rates an increase in the premium paid for light/sweet (e.g. Brent) crudes used by Caltex compared with the heavy/sour crudes used by major refineries in the region (the light/ heavy spread), and the strengthening of the AUD/USD exchange rate (as the CRM components are US$ based, strengthening of the AUD/USD exchange rate reduces the A$ revenue earned by Caltex).

14 Commodity price risk Caltex is exposed to the risk of price movements in both crude and finished product through its purchase and sales transactions, as these impact Caltex s earnings and cash flows. Through its Group Treasury Policy, Caltex seeks to manage this exposure by utilising both crude and finished product swap contracts. Caltex s policy has been not to hedge refiner margins. Foreign exchange risk Caltex is exposed to the effect of changes in foreign exchange rates. Caltex purchases crude and products in USD and sells predominantly in AUD, with pricing formulas reflecting changes in the AUD/USD exchange rate. Due to timing differences between payments for purchases and pricing of sales, a change in the foreign exchange rate may negatively impact Caltex s earnings and cash flow. Additionally, the CRM is determined principally with reference to the USD Singapore spot product price relative to the US dollar Brent crude price. An increase in the AUD/USD exchange rate will adversely impact Caltex s Australian dollar refiner margin, and therefore refining earnings and cash flows. Foreign exchange contracts (forwards, swaps and options) are used to hedge foreign currency exposure in accordance with Group Treasury Policy. The instruments used to manage foreign exchange risk expose Caltex to fair value foreign exchange rate risk and counterparty credit risks. Exposure limits are set for each counterparty to ensure that Caltex is not exposed to excess counterparty credit risk. Liquidity risk Due to the nature of the underlying business, Caltex must maintain sufficient cash and adequate committed credit facilities to meet the forecast requirements of the business. From time to time, Caltex will be required to refinance its debt facilities. There is no certainty as to the availability of debt facilities or the terms on which such facilities may be provided to Caltex in the future. Caltex seeks to prudently manage liquidity risk by maintaining a capital structure that supports its activities and centrally monitoring cash flow forecasts and the degree of access to debt and equity markets. A key element of its funding strategy is the use of committed undrawn debt facilities, with an extended facility maturity profile. Operational risk The nature of many of Caltex s operations is inherently risky. Major hazards may cause injury or damage to people and/or property. Major incidents may cause a suspension of certain operations and/or financial loss. To mitigate against potential losses from such risk, Caltex has in place an integrated management system for managing safety, health, environment and product quality, as well as a comprehensive risk management framework which actively manages and mitigates these risks from the corporate Group level through to the local site operating level and involves active engagement at the senior management level. Caltex also manages certain major risk exposures through its comprehensive corporate insurance program, which provides cover for damage to facilities and associated business interruption as well as product liability. Caltex s operations are heavily reliant on information technology. While these systems are subject to regular review and maintenance, and business continuity plans are in place, if these systems are disrupted due to external threat or system error, this may have an adverse effect on Caltex s operations and profitability. In this regard, Caltex actively monitors and responds to potential local and global security threats. Competitive risk Caltex operates in a highly competitive market space, and could be adversely impacted by new entrants to the market or increased competition from existing competitors, changes in contractual terms and conditions with existing customers, and/or the loss of a major customer. Caltex has in place various strategies to manage these risks which are designed to sustain and improve margins by reducing costs, improving operating efficiencies and encouraging sustainable performance. These strategies include the implementation of organisational restructuring, geographic diversification, and the allocation of capital expenditure to those businesses with the potential to deliver strong earnings growth. Environmental risks Caltex imports, refines, stores, transports and sells petroleum products. Therefore, it is exposed to the risk of environmental spills and incidents. It is also responsible for contaminated sites which it operates or has previously operated. As part of its approach to managing these risks, Caltex applies strict operating standards, policies, procedures and training to ensure compliance with all applicable environmental laws, and Caltex s spills performance is a key performance metric. Caltex is focused upon achieving better environmental outcomes across its business as part of its strategy to deliver solid and sustained performance. Further details on how Caltex manages its environmental regulations and performance are outlined below in Environmental regulations. Demand for Caltex s products Caltex s operating and financial performance is influenced by a variety of general economic and business conditions beyond Caltex s control, including: economic growth and development, the level of inflation, and government fiscal, monetary and regulatory policies in the event of a global or a local economic downturn, demand for Caltex s products and services may be reduced, and advances in automotive technologies including fuel efficiency improvements as well as technology substitution to hybrids, electric vehicles and fuel cell electric vehicles all of which may operate to impact Caltex s financial performance. To manage these risks, Caltex has implemented key initiatives to reduce costs, improve operating efficiencies and encourage sustainable performance within Caltex. These initiatives include the implementation of organisational restructuring, geographic diversification, and the allocation of capital expenditure to those businesses with the potential to deliver strong earnings growth. 47